A judge in North Carolina has ruled that Wal-Mart is not entitled to a tax refund from the state revenue department, in a case that could have ramifications for the way companies in the US structure certain aspects of their tax affairs.
Wal-Mart was appealing a USD33.5 bill for back taxes, penalties and interest imposed by North Carolina, which had argued that rental payments made by the company to a Wal-Mart subsidiary were improper. However, in a judgment signed by Special Judge of Superior Court Clarence Horton Jr on December 31, and reported by the Wall Street Journal on January 4, it was determined that "there is no evidence that the rent transaction, taken as a whole, has any real economic substance", other than cutting taxes.
Wal-Mart was accused by the state of transferring the ownership of its stores to a real-estate investment trust, a subsidiary of the company, and then improperly reducing its tax liability by taking deductions for rental payments which remained in the company - a reading of the situation with which Judge Horton agreed.
"It is particularly difficult for the court to conclude that rents were actually 'paid' when they subsequently returned to the payor corporation," he wrote.
Wal-Mart has reportedly transferred ownership of all of its stores to the subsidiary mentioned in the legal dispute with North Carolina, and according to the Journal, it may have saved about USD230 million in tax across the US as a result of the strategy.
The recent judgment could strengthen the cases of other states which are seeking to outlaw such practices, and could affect other companies with similar arrangements to those of Wal-Mart. Three other states are said to be challenging Wal-Mart's tax strategy, while six have legislated an attempt to stop such practices.Wal-Mart said that it had not taken a decision on how to proceed after the ruling, but an appeal is possible.
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